A comprehensive hedging tool! Regardless of how the Federal Reserve cuts interest rates, gold can hedge against everything

According to the Zhitong Finance and Economics APP, as concerns about the US economic downturn intensify, the attractiveness of gold as a safe-haven asset has increased, driving its price to historic highs. This is closely related to the market's expectations of a Fed rate cut.

However, even if the Fed takes unexpected actions, gold may prove to be a "comprehensive tool to hedge risks under any circumstances." Brien Lundin, editor of the Gold Newsletter, pointed out that when the Fed actually cuts rates or approaches the decision date, the market may see the risk of "buying the rumor, selling the fact." However, the allocation of gold in global investment portfolios is increasing, as gold has the opportunity to perform well whether the Fed is gradually cutting rates or making emergency cuts during an economic downturn.

On Thursday, despite the stock market falling and the US dollar rising, gold continued to rise. Subsequently, as the stock market rebounded and the US dollar index fell, gold further rose. Lundin stated that this indicates that gold has established its position as a hedge tool "regardless of what happens next."

On Friday, gold futures for December delivery rose by $30.10, or 1.2%, to close at $2610.70 per ounce, after hitting a historic high of $2614.60 during the session. Last week, gold prices rose by 3.4%, marking the 34th historic high this year.

Currently, the short-term momentum of gold prices is being driven by the momentum in Western markets, especially in anticipation of a rate cut in the US. Joe Cavatoni, Senior Market Strategist at the World Gold Council, stated in his comments on Thursday that the Fed will announce its monetary policy decision next Wednesday. As of Friday morning, the CME FedWatch tool showed a 57% probability of a 25 basis point rate cut at the Fed's meeting next week, with a 43% chance of a 50 basis point cut. Lower rates typically help support gold, which yields no interest.

Cavatoni believes that although the market's expectations of a rate cut are already reflected in the rise in gold prices, this impact has not been fully realized yet. He expects that a rate cut could further drive up gold prices in the coming weeks and lead to increased investor demand.

Diversification of Gold Demand

Cavatoni pointed out that as a global asset, the World Gold Council has always been monitoring "all forms of gold demand," especially as gold prices hit new highs, indicating that these demands may be changing.

He mentioned that the council is closely monitoring the flow of jewelry demand in Asia to observe the performance of investment demand in the region. At the same time, they are also evaluating other demand factors from Western investors, including increased uncertainty from upcoming elections and gold as a tool to hedge "unexpected risk events."

Globally, central bank demand remains a major driver of gold demand, reaching the highest levels in 14 years in 2022 and 2023, reflecting ongoing concerns about dollar-based assets and inflation In addition to the demand from the central bank, traders seem to show a stronger preference for certain forms of gold investment. Adrian Ash, research director at BullionVault, pointed out that the current activity in the gold market is mainly focused on speculative trading of derivative contracts rather than physical gold. Users of the platform recently chose to take profits when the gold price hit a historic high, while coin dealers were overwhelmed by second-hand products.

According to Ash, trading volume of gold futures contracts on the CME derivatives exchange surged by over 26% on Thursday, while trading volume of gold options contracts soared by 80%. At the same time, the world's largest gold-backed ETF - SPDR Gold Trust Fund - grew by 0.9% in September.

Despite a 14% increase in gold demand on the BullionVault platform in the past 24 hours, the selling volume surged by 298%, resulting in a net clearance of nearly 0.1 metric tons. Ash believes that investors chose to take profits as gold hit historic highs against the US dollar, euro, and pound, mainly due to the lack of leveraged trading and market fear, with the rise in gold more driven by expectations of an imminent Fed rate cut rather than geopolitical tensions.

Nevertheless, Ash also acknowledged that "geopolitical conflicts and tensions are providing support for the upward trend in gold." This is mainly due to the continued demand for gold from emerging market central banks, but what is currently driving gold to set new records is speculative behavior on the Fed rate cut.

Ash warned that if the Fed disappoints the market at its policy meeting next Wednesday, whether in the decision itself or in the new dot plot forecasts, it could provide an opportunity for long-term investors expecting a pullback, or even trigger a correction